August 27, 2020

How Much Can I Earn Whilst Bankrupt?

Some people spend a lot of time and money to “hide their assets” in case their finances go south and they are faced with bankruptcy. They might set up trusts and conduct their business in the trust’s name, ensuring any assets are out of a Bankruptcy Trustee’s reach if they are ever faced with bankruptcy.The result of their efforts; the person appears asset poor, but in fact they have access to wealth. It also means that a Bankruptcy Trustee can’t realise the Trust’s assets for the benefit of creditors (except under exceptional circumstances, for instances where a voidable transaction has taken place. That’s a conversation for another day).

You’re probably thinking, why bother bankrupting someone if the Bankruptcy Trustee can’t recover assets “hidden” in a trust and where’s the deterrent to avoid bankruptcy? That’s where Income Assessments come into play. Income Assessments are a tool to allow Trustees to collect funds into the Bankrupt Estate.

A Bankrupt’s income is assessed by their Trustees for each year (or part thereof) of the bankruptcy. Each year is known as a Contribution Assessment Period, or CAP for short. An Income Assessment may result in the Bankrupt being liable to pay compulsory contributions to their Bankrupt Estate.

Let’s look at how Income Assessments work. The Bankruptcy Trustees have a formula to follow when assessing a Bankrupt’s income.

The formula is:

Assessed Income less Actual Income Threshold Amount, then divide the answer by 2.

The answer is the liability that the Bankrupt is required to pay to their Bankrupt Estate for Income Contribution purposes. Basically, if a Bankrupt earns over the Actual Income Threshold Amount (AITA), they are required to pay half of those earnings to the Bankrupt Estate.

So what is Assessed Income?

This is a Bankrupt’s gross income and can include:

  • Wages/Salary;
  • Interest Income;
  • Rent Income;
  • Fringe Benefits received;
  • Tax Refunds;
  • Loans from family members; and
  • Much more.

There is also a list of excluded types of income:

  • Centrelink Family Benefit;
  • Government Rent Assistance;
  • Child Support income (if under a formal agreement);
  • Payment for Jury or Witness Services;
  • Compulsory Superannuation;
  • Income under the National Disability Insurance Scheme; and
  • Allowances received by members of the Naval Reserve, Army Reserve or the Air Force Reserve.

Income Tax, the Medicare Levy Surcharge and Allowable Deductions are then subtracted from the gross income figure and to come up with the Bankrupt’s Assessed Income. Allowable Deductions in bankruptcy are not necessarily the same as tax deductions. For a deduction to be claimed in bankruptcy, the expense must be “necessarily incurred” for the work performed by the Bankrupt. Child support payments under a formal agreement are also considered as an Allowable Deduction.

The AITA is dictated by the Australian Financial Security Authority (AFSA). AFSA update these figures half yearly, on 20 March and 20 September and they can be found here. From 20 March 2020, the AITA for a Bankrupt with no dependents is $59,031.70.

You’re probably asking, who is considered a dependent and what if a Bankrupt has 1 or more dependents? A dependent is someone who wholly or partly relies on the Bankrupt for economic support and earns less than the prescribed amount (currently $3,708) per CAP. The prescribed amount is updated each 20 March and 20 September, in line with the AITA. For each dependent the Bankrupt claims, their AITA threshold increases, for up to 5 dependents. Specific details can be found on the AFSA website by searching “indexed amounts” or by going here.

To finalise the Income Assessment, the AITA is deducted from the Assessed Income, then the answer is halved. This is the amount the Bankrupt is required to pay to their Bankrupt Estate. The liability can be paid down via a payment plan, which should not cause financial duress to the Bankrupt.

If a Bankrupt refuses to pay down their Income Contribution liability, the Trustees can apply to AFSA for a garnishee notice that requires the Bankrupt’s employer to pay a percentage of the Bankrupt’s wages to the Bankrupt Estate. In the worst case scenario where a Bankrupt won’t pay down their liability, they can be bankrupted again (this is extremely rare). It’s best for Bankrupts to co-operate with their Bankruptcy Trustees, provide information when asked and to prioritise paying down their Income Contribution liability.

If you (or your client) are facing bankruptcy and have questions on how your income will be assessed, please call us to discuss or learn more here.

Article written by Cameron Atchison.

Senior Accountant – SV Partners Brisbane

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